“All money is debt” is only true in a fictional accounting sense. In practical terms, it’s complete fantasy.
The monetary base (central bank money) is not debt in any legitimate sense. It shows up as “liabilities” of the central bank only because we’ve been dealing with double-entries in our financial books for so long, we have no other established way of doing things. But there is literally no obligation present for the central bank. Their currency “liabilities” need never be paid back, at any time, for any reason. Those accounting-based liabilities can exist in perpetuity, because the central bank has no legal obligations after issuing the money. No court is going to enforce payment on an obligation that does not exist. To call that kind of money a form of debt is to get so caught up in the accounting definitions that you lose all track of reality.
Monetary base is not debt. It is not an obligation of the central bank.
This is false, because the first step was false. The central bank can create more money by creating fictional obligations that it need never pay back.
No matter what the accounting identity says, the creation of new monetary base can increase the supply of savings available (depending on the productive capacity of the economy as a whole) without creating any new legal obligations for the central bank. Governments universally accept tax payments made with the monetary base, and in that sense the base is an obligation of the government, but even that is shaky, because the tax burden itself can be increased at the government’s own discretion. Calling the monetary base an obligation in any broad sense can be shaky proposition. Calling the base a kind of “debt” is beyond the pale.
This is true only in the most useless definitional sense.
A country that is experiencing hyperinflation is bankrupt in all but name. No, they won’t file Chapter XI, but calling them bankrupt is still a valid description of a government what done printed its way into penury.
Making something true by definition is of no use whatsofuckingever if your resulting equation provides no meaningful description of how the real world works.
These accounting identities lose their usefulness when they’re describing the functions of governments and central banks. This should come as no surprise. They were created for micro purposes, to track a single entity’s accounts. The macro world is, obviously enough, a great deal stranger.
It wouldn’t necessarily be counter-productive to reduce government spending, if the central bank were to pick up the slack. The MMT types would even seem to agree with that, based on the (false) notion that another form of debt is being created by the central bank.
Where they go wrong is in assuming that the new money can be easily destroyed. It can’t be. The creation of new money is easy, because the technocrats just push some buttons on the computational machine to create that new money out of the void. But taking those dollars back out of the system? Well, then they have to have some claim on the dollars. When they’re trying to reduce the money supply, they have to have some way to lure back dollars which they no longer own. They need to have sufficient assets to sell to suck up all those dollars again, or they need to do even more invasive tinkering, like jacking up the reserve requirements of banks to keep dollars from bouncing around so quickly. It’s typically a painful process in the short-run, and that’s why stopping inflation can often be harder than getting it started in the first place.
They cannot “deflate at any rate they want” in any real sense. This is not a finely calibrated machine, it is a lumbering beast that can and will trample the innocent into a bloody pulp if its handlers lose all sense of caution.
This is completely irrelevant.
Yes, banks are not strictly watched 24/7 to make sure they don’t loan past their reserve requirement. Sure, they’ll happily make as many seemingly profitable loans as they can from day to day, without keeping on exact tally of their reserve requirement. But they still need to have cash – monetary base – on hand to pay out the loan. If they ran out of base, they could not pay the loan. Full stop, end of story. And then, when the Fed check-up day rolls around, they absolutely need to scrounge up reserves from somewhere to back up to their required amount.
Those scrounged up reserves don’t necessarily have to come from depositors. They could come from other banks. That is… unless the other banks have already loaned out all of their monetary base as well, and are also in need of reserves. In this case, you’d see upward pressure on the interbank interest rate, and the open market desk at the Fed would respond to that pressure by supplying more base after-the-fact, as it were, to help the banks to meet their reserve requirements on loans they’ve already made. That is… unless the Fed was content with allowing the interbank interest rate to rise. In which case, interest rates go up, and banks are forced to cut their loans because they can longer be assured of being able to have the required reserves to back those loans.
Now, there’s almost always no surprise in the Fed’s decision to raise rates. They offer plenty of advanced warning, to make sure the banks will have a cash cushion ready when things are about to get tighter. The banks generally appreciate that warning, because if the Fed stops supplying the additional dollars, then the banks hit a hard limit of how much they’re able to lend.
They won’t tell you they’re waiting for depositors, though. They’ll just plain tell you fuck off in a time of tightening, but in the nicest possible bankers’ terminology. They’ll still be making loans, but not nearly as many, and only to the best possible candidates. If you don’t get a loan, it’s because the tight times will have increased their lending standards to a point where you no longer make the cut. “Waiting for deposits” has nothing to do with anything. In a credit crunch, only the most reputable borrowers get their hands on some cheese.
I can’t think off the top of my head of any monetary economist who would disagree with the semantic notion that banks “make money” when they make loans. The definitions of the broader “money supplies” such as the M1 and M2 are entirely based on the idea that banks expand the monetary base into the broader money supply with their fractional-reserve lending, and when economists talk about the money supply, it is almost exclusively a reference to the broader bank-magnified money supply, unless otherwise noted. (I will add the caveat that the M1 “broad” money supply is extremely strange right now.)
This is essentially a semantic point, as you say, but there is extremely broad agreement about the definition. Bank loans create money. Bank deposits (bank IOUs) are a negotiable instrument, a medium of exchange, and are therefore money. You remain, of course, completely correct that banks need to have “cash” available (the monetary base) to actually pay the loans that they make. They don’t just hand magical IOUs back and forth forever, as Linus seems to think. The IOUs are always backed by base. That is, in fact, what a bank deposit/IOU is: a promise to pay back monetary base on demand.